Whither rates?

Been noodling around with rate indices this morning and came up with this chart:

rate index

As you doubtless know, there are several free indices that follow property-casualty rates. (Wrote about several here.) I’ve picked out two, Towers Watson’s CLIPS and the MarketScout Barometer, and created an index off their mid-year rates.

Both show rates climbing through 2004, then falling till 2010 or so, then climbing. MarketScout shows much sharper swings, in both directions. Which of these you believe should drive your attitude toward the current p/c market.

Opinions differ on this, of course, but I feel much more comfortable with the P.O.V. Towers puts forth. First, from my research, I believe CLIPS is more reliable – it standardizes the rate indices from several companies. The individual companies have a stake in getting their own numbers right; Towers is able to leverage off that need.

MarketScout’s rate changes are built from information received from independent retail agents, supplemented by a survey. Rates are collected on an “apples-to-apples” basis – averting a common pitfall – but I personally believe the index fluctuates more than the market. When rates are rising, I think MarketScout overstates the increase, and when they are falling, I think it overstates the decrease.

So where are commercial rates headed in 2013? The Towers survey indicates that rates are about 10% higher than in 2002. Whether that’s adequate depends on your view of frequency and severity trend. In any case, you wouldn’t expect a “traditional” hard market – increases of 15% or more – anytime soon.

The MarketScout Barometer shows rates are 20% lower than they were in 2002. If you believe that, then you would anticipate a steep spike in rates some time in the next couple of years.

I guess that shows where my money is.


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